20.4.08

Turkey's foreign direct investment (FDI) figure for the first two months of 2008 has experienced a very significant drop.

Turkey received $1.5bn in foreign investment during January and February 2008 - an 80.4% decrease from the FDI levels achieved during the first two months of 2007.

FDI levels fell 37% from January to February. This trend will most likely continue as investors continue to fret over new details involving the tense political situation that currently defines the country.

9.4.08

The drama surrounding the potential closure of the ruling AKP party acquired a significant nuance with the decision of Standard & Poor's to cut Turkey's credit rating to three increments below investment grade (BB-) last week. The credit agency attributed its sudden decision to "the increasingly challenging political and global environment that Turkey faces in the near term". Moody's, on the contrary, has decided to keep its rating unchanged, choosing to focus on more fiscal factors for its credit appraisal.

While S&P's credit rating cut was probably a bit rash, its verdict on the Turkish economy was nevertheless inevitable at some point in 2008. After multiple years of robust growth, it has become increasingly clear over the last nine months that the country's economic pendulum has begun to swing away from good fortune. Only the very brave, or ignorant, have argued that the Turkish economy could easily navigate the brewing global downturn. In this regard, S&P's announcement can be taken as the symbolic beginning of a new era of Turkish political-economic history; the good times will no longer roll like they once did.

The current economic situation is not particularly dreary for most segments of the Turkish population other than inflationary pressures on food prices. However, as growth projections are revised due to the impending slowdown in foreign direct investment (FDI), the economy will increasingly experience more unpleasant realities. The mechanics of this impending economic malfunction are largely related to the Turkish economy's need to attract FDI in order to stave off the symptoms of its looming account deficit. In addition to the usual threat posed by cheap imports from China, one of the main causes of Turkey's robust account deficit has been the AKP's legacy of generous public spending. It should also be noted that this spending has made a significant contribution to the party's popularity in certain parts of the country.

Economic issues are perhaps of highest importance to Turkish voters and may have in fact been responsible for the AKP's resounding victory in the July 2007 referendum. It is therefore the opinion of this observer that any attempt to predict how the AKP will weather the current legal storm must be considered in the context of economic factors.

If Turkey's constitutional court decides to advocate the closure of the AKP on grounds of anti-secular activities, members of every single part of the Turkish political and religious spectrum will face a great economic punishment. The reasons for such a forecast are in fact quite simple.

1.) Any legitimate sympathy Turkey in fact has in the EU political universe vis a vis its EU candidacy will vanish over night. Without even the lingering possibility of EU membership, Turkey will become a much less attractive place to a certain breed of foreign investor. Whether Turkey truly needs the EU from an economic standpoint is separate question. What is certain is that "perceptions" of Turkey among investors will be damaged if the EU has reason to distance itself.

2.) While the AKP has probably been partly responsible for the considerable amount of Arab investment from Gulf sources that has poured into Turkey over the course of its political tenure, its actual skill for "economic management" can be isolated to a single issue: stability. As an emerging market prone to natural disasters, military coups, terrorism activity, and domestic turmoil of many kinds, the AKP has been very adept at keeping a lid on Turkey's eternally boiling pot. By Turkish standards, the political scene has progressed quite smoothly over the past couple of years and this has emboldened investors to make greater financial commitments.

3.) Closure of the AKP would require new elections and the creation of a new government. Assuming economic conditions slide as a result of the political turmoil and the EU chooses to take a step back from Turkey, it is quite likely that the Turkish public would turn inward. An introverted Turkish public might very likely gravitate towards the right-wing nationalist arms of one Devlet Bahçeli, the head of the MHP or Nationalist Movement Party. Having won 14.3% of the electorate in the July 2007 vote, MHP might prove to be the biggest beneficiary of a court ruling against the AKP. The social turmoil that this gravitation to the right would entail could become extremely unpleasant and would further stall the country's economic progress.

It is unlikely that the AKP will face closure or that any of these doomsday scenarios will see the light of day. Turkey can nonetheless grasp this moment in its political history as an opportunity to evolve its democratic institution to its next possible level of development.

It may indeed be true that the AKP is at fault for transgressions against secularism. However, Turkish proponents of secularism and other supposed "pro-Western" elements of society would be remiss for decisively terminating the life of a democratically elected political party. While Turkey is a democracy in practice, it remains reluctant to emotionally embrace the kind of pluralism that characterizes the world's strongest democracies. Very few people in Turkey seem to sufficiently trust their government in order to hold the expectation that government will protect the rights of individuals on any end of the political spectrum. It is for this reason that most secular Turks consider it unthinkable for the AKP to protect the rights of women who chose not to wear the headscarf. Conversely, religiously-observant Turks continue to fight for equality in Turkish society, as evidenced by the removal of the law against women wearing head scarves on the grounds of Turkish universities. It is quite unclear whether this particular reality concerning head scarves in universities will endure beyond the era of the AKP.

If the country's constitutional court were to decide to reprimand as opposed to ban the AKP, democracy in Turkey will have taken a giant step forward. By allowing the AKP to persist, albeit under certain constrictions that force it to better "respect" the secularist framework of society, Turkish politics would have gained an important new dynamic. Such a decision would help establish an environment in which the country's emerging religiously-minded values can coexist with its traditionally secular mores and legal framework. In the long term, this is something for which both the EU and foreign investors would enthusiastically cheer.

Purpose

The Bosphorus Watch facilitates the exchange of information and opinions regarding the geopolitics of Turkey and the region. Like comparable current events projects, The Bosphorus Watch depends on multiple points of view in order to best interpret the political, economic and social issues at hand. Interested individuals are therefore encouraged to contribute their own analysis to make The Bosphorus Watch as thoughtful as possible.

About

The author of this site graduated from the University of Chicago in 2006 with an undergraduate degree in Near Eastern Languages and Civilizations. Having studied the Turkish language and traveled by bus through much of Anatolia, he now works in Istanbul for a publisher of political-economy reports on emerging market economies.